Partial privatisation, EPRDF’s Economic Reform 101: Killing two birds with one stone

(Tsega Menkir)

The thirty-six strong executive members of Ethiopian Peoples Revolutionary Democratic Party (EPRDF), the only party that has been in power in Ethiopia for the last 27 years, in its recent quarterly meetings, has announced the partial sell-off of some of the state owned enterprises (SOE).

These SOEs are Ethiopia’s most prized assets and crown jewels; such as the Ethiopian Air Lines, Ethiopian Telecom, Ethiopian Maritime transport, Rail way service, industrial parks, etc,. It is fair to say that such an egregious move by the party, which is infamously known to be hubristic and secretive, resulted in the public’s bewilderment and anger, due to little or lack thereof any clear explanation for the reason behind the partial privatisation.
Recently, a wind of change has been blowing in Ethiopia, when the reformist members of the party elected the new chairman of the party, Dr Abiy Ahmed, who is one of the leading member of the reformist group to be Prime Minister. Since the Prime Minister’s ascension to power, the sweeping reform has been on a high gear and every Ethiopian has been on a rollercoaster political ride, unable to keep up the pace with which the sea of change has been taking place.

The decision to partially privatise these SOEs, an economic rollercoaster by its own right, has generated mixed reactions amongst Ethiopians. This ambivalence by Ethiopians of different strides, backgrounds and political affiliations, ranged from elation of neoliberalism to modest scepticism and perceived betrayal of self-identity for selling the Crown Jewels.

While neoliberalism is yet to be born and crawl; the public’s suspicion of the sale SOEs is well founded given the track record of EPRDF in the past. If history is any evidence to the future, regrettably some public companies were sold off in the past to the ruling party’s cronies for much less than their market values. The thought of history repeating itself would scare many Ethiopians and rightly so. Saying that, if utmost care is taken not to replicate the ills of the past, this writer believes that the sale of SOEs this time round is not only timely but also necessary for the following reasons.
It has been an open secret that the Ethiopian government has faced a deep forex shortages due to its myriad of problems. To begin with, EPRDF’s strategy of achieving economic growth by heavily financing mega projects mainly through government expenditures finally came home to roost.

These projects, large and small, the  investment return of which would take few years to plough back, were largely funded by borrowed foreign capital. By the same token, a quick glance of the trade balance, clearly indicates the ever widening gap of imports over exports, that has added more stress on the forex earnings.

Moreover, the expulsion of Ethiopian expats from The kingdom of Saudi Arabia and the Middle East; together with the Ethiopian diasporas sustained blockade on remittance payments; and not to mention, the persistent protests of the last couple of years and the declaration of the state of emergency has certainly slowed down tourism and reduced export production.

Last but not least, the doomed currency devaluation added more pressure to the forex reserves and encouraged capital flights. The culmination of these facts has become the raison d’etre of bankrupting the forex reserves in few weeks rather than months.

It is a fair assessment that, these multifarious events have been annus horribilis for Ethiopia’s forex reserves. As a result, the foreign lenders, which were heavily financing the government’s debt, if the recent report in The Financial Times is believed to be true, has started to shy away from extending their once generous hands, sighting the government’s financial solvency.
Be that as it may, the foreign capital borrowed must be paid; and when your bailers run for the door, your last resort is selling what you have, to pay what you owe.

Accordingly, one of the main reasons why the partial privatisation of these SOEs, where the government will own the majority stake, is to raise the necessary foreign capital to top up the forex reserves and at the same time settle its debt obligations to the rest of the world.

The alternative, otherwise, is face the possibility of defaulting on its creditors and a possible bankruptcy that will put future loans at risk and almost make them impossible to get. Therefore the government has indeed faced a Hobson’s choice; i.e., it has to sell worthy SOEs and pay its dues, as defaulting on its obligations is not a feasible alternative anymore.

It should be noted however that, while a partial privatisation might raise the necessary funds for the short term, and help the government alleviate its current forex problem; it cannot be a magic bullet and by no means a long term solution. Due to its myriad of problems, the government needs a cocktail of economic as well as political antidotes for sustainable long term forex solution.
Moreover, the developmental state model, whereby the state takes full control of running the economy, which EPRDF has subscribed to until now was another cause of its forex insolvency.

One of the problems of such an economic model is that the government is heavily invested in projects while crowding out private investments. In so doing, it is giving little or no space to small and medium sized enterprises (SME) which are thought to be the engines of growth for an economy while creating the much needed employment opportunities.

Especially at the time when the state run economy could not expand anymore in creating more employment and where an economic misfortunes of both unemployment and inflation (stagflation) are prevalent, help from the private sector is not only necessary to relieve the government’s stress from its forex problem and unemployment but it is also a must, and not a luxury that it can afford to ignore.

Therefore, the first step to getting to liberalising the economy and bring the private sector onboard is a partial privatisation and opening up the economic space for the private sector; and at the same time reducing the crowding out of the state run economy.

Likewise, it has been reported that the reformist groups intention is to open up the political space; if that is the case, for the political platform to succeed and democracy to have a strong foothold in the society; liberalising the economy is a necessary condition.

When that happens, the recent political reform that has brought a renewed hope and aspirations in Ethiopia could be able to materialise backed up by an equal magnitude and scale of economic reform; i.e., liberal politicking requires liberal economic principles as they do not only go hand in hand and reinforce each other but also it is the only way forward to the next level for the Ethiopian economy to succeed.
Furthermore, the reformist group, led by Dr Abiy, has shown its commitment to root out corruption, especially in SOEs, that has been endemic in Ethiopia. To that effect, the infusion of private capital as minority stake holders would result in higher participation of the private capital, create an environment of more transparency in the board room and control of the management.

The private sector’s involvement in the oversight of the management of the SOEs, helps amongst many other things, in facilitating the efficient utilisation of the partially privatised SOE’s resources; thereby allowing it to curtail wastage as well as pilferages. It encourages more transparency in information disclosures about the SOEs financial positions that has been a secrecy until now.

By the same token, giving the much needed extra hand to the reformist group’s fight against corruption and better use of the public good. It is also a no-brainer that for an economy to grow at a sustainable rate, creating a saving economy is the only way forward. The first step to getting a saving economy would then be a partial privatisation with the aim of establishing fully fledged privatisation with strong SMEs in the future.
Finally, EPRDF is faced with myriad of political as well as economic problems it wilfully chose to ignore in the past. It looks like it has an awakening recently if the reformist group’s plan goes ahead to bring about solutions to these problems.

For some it might sound like a choice rather than a necessity; but unfortunately, is not anymore a luxury the ruling party can afford to ignore. It is a matter of survival for the existence of EPRDF as a party and Ethiopia as a country. Saying that, there is no magic bullet that fixes the ills of the myriads of political as well as the economic problems Ethiopia has faced; but if there is a will, there is a way.

Therefore, a cocktail of political as well as economic solutions would not only alleviate the problems at hand but with the right dosages, both the politicking and the economy not only gets better but will be on course to be sustainable too.

In order to do that, the political reform should go hand in hand and in full gear with the economic reform; as the country manages to create both a political as well as an economic stakeholder society, where everyone is responsible, comfortable and at ease with each other and with the government. So that, as much as the political space is opening up the private sector is encouraged in the economy to flourish too.

This will help the country in its fight against the endemic corruption, help the government in raise the elusive foreign capital and finally liberalise the economy to establish a fully fledged democratic stake holder society where the stock market becomes a reality.

Guest Author

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